May 4, 2014

Readers suggested a topic on the housing bubble. “Is the current housing market another bubble or a long term trend? My Uncle was an engineer in ‘Silicon Valley’ before there was any silicon in the valley. When he died in 1986, his house sold in 1 week for $375,000. I remember everyone in my family saying the price was insanity. 1,780 SF. $210/SF. Everyone is still saying the same thing today: Insanity at $2,000,000. $1,123/SF.”

“Here is reality: The rate of appreciation over the last 30 years has been about 6%. This SF peninsula market may be in a bubble today, but it is more likely just a long term trend. Wages in Silicon Valley for engineers of his caliber have easily grown faster than 6%/year.”

A reply, “Same bubble, wrong question.”

One said, “The definition of insanity is repeating the same sh*t and expecting different results. Now stop beating a dead horse. If you have not been able to understand this housing bubble you never will.”

And finally, “I can’t afford a luxury car. The question is; should I buy one or rent it?”

The Desert Sun in California. “Foreclosure activity rose in March as a small backlog of distressed properties flowed into the market, a new housing report shows. There are fewer short sales because more homeowners have equity in their houses as values rise, said Michael Ricks, an REO director for Windermere in Palm Springs. The remaining foreclosures involve investor-owned properties more often than individual homeowners, Ricks said. ‘We’re not really seeing people do short sales,’ Ricks said. ‘Short sales have almost stopped. They’re either frustrated or they’re now equity sellers.’”

“Roughly 18 percent of homeowners in Riverside County are seriously underwater, meaning they owe at least 25 more than the estimated value of their home, according to RealtyTrac. Bret Cohn, a senior loan officer with Stearns Lending in Palm Desert, said the buying frenzy is over. Values are going up, and there are fewer opportunities to clip cheap, distressed properties. The few that lagged behind are now going through the foreclosure process, he said.”

“‘Either some people got involved in loan modifications and those have run their course, or they just realized now, this isn’t working,’ Cohn said.”

Weekend InvestorThe New Math of Renting vs. Buying
Here’s how to figure out which strategy makes the most financial sense.
By AnnaMaria Andriotis
May 2, 2014 6:17 p.m. ET

Buying a home has long been part of the American dream. But rising prices have made renting less expensive in many places.
How They Rank

See the full rankings for 54 metro areas, and how Deutsche Bank did the math, on Total Return.

People often aspire to own a home for reasons that have little to do with money, and rental options are limited in some communities. Yet owning property can limit your flexibility to move when you want and ties up a lot of your money.

The median sales price of existing single-family homes rose 11.4% in 2013 from the previous year—the highest yearly increase since 2005, according to the National Association of Realtors. Prices in many places, including Los Angeles, Baltimore and Portland, Ore., rose even more last year.

The monthly cost of renting was lower than buying in 20 large metropolitan areas at the end of last year, the most recent period for which data are available, according to figures provided exclusively to The Wall Street Journal by Deutsche Bank. DBK.XE -0.49% That is up from 15 large metropolitan areas a year earlier.

The bank calculates the costs in 54 markets based on average local rents and median home-sale prices, which it uses to estimate monthly mortgage payments for a hypothetical buyer in the 25% federal income-tax bracket.

Renting had been less expensive than buying on average across all the areas Deutsche Bank tracks since at least the early 1990s. But that changed during the financial crisis, as home prices plummeted and interest rates on mortgages dropped. The current rally in home prices appears to be pushing the housing market back toward the historical norm.

Where Renters Made Gains

Here are the metro areas where renting made the biggest gains against buying in the fourth quarter of last year compared with a year earlier.
View Slideshow

A renter in Orlando paid $1.24 a month for every $1 a buyer spent last year, down from $1.44 in 2012. Corbis

The five markets where renting recently became cheaper than buying include some popular cities and suburbs where home prices are climbing fastest: Sacramento, Calif.; Phoenix; San Bernardino and Riverside, Calif.; Austin, Texas; and Northern Virginia.

Buying is still cheaper in 34 metropolitan areas Deutsche Bank examined, including Cleveland, Chicago and Atlanta, though prices rose last year in those areas, as well.

Renting has become more appealing financially than it was at the end of 2012 in places such as St. Louis; Orlando, Fla.; and Minneapolis, though buyers still pay much less than renters in those areas.

The buying advantage was slight in some places. Miami, San Antonio and Las Vegas are among the hot markets where renters appeared to be on the verge of being better off than buyers at year-end, according to the bank’s figures.

Buyers, of course, can build up equity as they pay down a mortgage, which can compensate for higher monthly costs.

Here is what you need to know to help figure out the most cost-effective way to keep a roof over your head. The first step is to understand the arguments in favor of buying and renting.
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Yeah, but what will they say? The years of propaganda will be hard to swallow for the public. I can hear it now; you told me to buy a house! You said the bubble was over, the loans were safe, you said it was cheaper than renting. I saw a report put out by the GSE’s that the government may have to bail them out again. It was in the context of them being denied current “profits” and the recent effort to eliminate them. But how will the public react if many more billions are spent to keep the GSE’s afloat? The entire “recovery” has been hinged on house prices and consumer spending. If people are on net leaving the housing market now, imagine what will happen when stories of FB’s, strategic default, etc, are on the front pages again.

BTW, I don’t want JM to think I’m stepping over his question; we have 500-600 years of data that show house prices barely increase over time. This long term trend is what you have to provide an exception to, in order to believe it’s a new normal.

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Comment by Blue Skye

2014-05-03 21:09:52

No way! He is looking at 3,6,8 year changes to call normal and you want to call in 600 years of trend? It would make the mania child’s head explode if he were to consider it, which he won’t.

A lot of people have no idea what is headed our way…

Comment by LolaLOL

2014-05-03 21:22:13

8 yrs ago was 2006, hah! You can talk about what you did, 3 or 6 years ago, but what are you going to do now?

If you bought a few years ago and claim to be doing well now, with some appreciation and cash flowing houses, then it guess that’s fine and you can just sit tight and collect the rents forever even if the valise drop again. But the crowing on here and constant shilling makes me think something else is up. Some pressure to keep on top of what is currently going on.

Where is that pressure coming from? It used to come from funny money interest only loans that would reset and so were ticking time bombs. What ticking time bomb are the shills trying to keep under wraps now? Rents falling? Adjustable rate mortgages that will reverse the cash flow? Something is there.

Comment by Jingle Male

2014-05-04 03:55:24

Maybe “they” are not shills.

Maybe they bought below reproduction cost when no one else could or wanted to buy.

Perhaps, as you said, “….you can just sit tight and collect the rents forever….”.

Perhaps they have long term fixed rate debt and are now reducing principal at 2-3% each year, and have already reduced their loan amounts by 7-8%.

Perhaps they have solid cash flow and are sitting on 4-5 years of increasing liquid assets.

Perhaps “they” made a great decision and feel this opportunity was one of their best moves they ever made.

One thing is certain. Time will tell. So far is has been quite positive.

Comment by Oddfellow

2014-05-04 05:38:02

¨we have 500-600 years of data that show house prices barely increase over time¨

Fascinating! What is this data source?

Comment by Blue Skye

2014-05-04 07:18:42

“reducing principal at 2-3% each year…”

Isn’t that a coincidence! Exactly what we estimated your ROI was based on previous snippets. Not 7% and not 20%. Still quite respectable for a hobby landlord. Congratulations.

Did you really buy these houses for less than $35/ft2? Incredible accomplishment.

More seriously, are these loans at 4% GSE guaranteed for principle residences?

Comment by LolaLOL

2014-05-04 07:43:46

That is why he is referring to “they” now. He doesn’t want to say “I”, “I bought, blah, blah, blah” because his is afraid to admit that, yes they are bought with loans guaranteed as principal residences, and thus, yes, he in deep doodoo potentially.

Comment by Jingle Male

2014-05-04 18:24:35

As I have stated many times here, the investment property loans are non-owner occupied loans and have no guarantee by the federal government.

Comment by Jingle Male

2014-05-04 18:44:32

Note the date on this post LolaLOL

Comment by Jingle Male
2014-04-30 03:44:59

Blue asks,

“I still would like you to answer if your six mortgages @ 4% are GSE guaranteed. I’ve asked many times. I am curious about specuvestors gaming the taxpayer. Something Paladin would have been interested in.”
My loans are not guaranteed by anyone or the government. They are non-recourse debt secured by the homes. The loans were obtained at or near the bottom of the interest rate market about 12-18 months ago.

All my loans (except my home, which is at 3.25%) are at non-owner occupied rates. I don’t believe in deceiving the lenders about claiming owner occupancy (though I have never seen anyone challenged on that falsehood).

My original acquisition loans were at rates around 5.25% to 5.50% in 2008-2010. When rates dropped, I refinanced all the properties.

I don’t make FED policy, but I accept it as an opportunity when it presents itself as beneficial.

Comment by Blue Skye

2014-05-04 18:48:22

Well, if you have answered me many times, it must have been after I fell asleep or several days later. Sorry! 4% on commercial loans? During the period you claim to have bought, small business loans were running 8%. How did you qualify for owner occupied FedGov subsidized rates??? Wondering if you had to write a business plan for the bank. Have you heard of such a thing?

MSM / NAR and the corporate oligarchy can only get away with so much lies.

But the facts are fewer people are earning the same amount or more than they earned in 2007. Their jobs downsized. 7 years. Interest rates cannot be held down forever - the longer the day of reckoning is postponed artificially, the worse the reckoning. And it cannot be canceled, only postponed at most.

The birth dearth is also continuing and will have an effect on Medicare, social security, then taxes.

The federal debt is still growing. No Republican candidate sponsored be the RNC will be promoting tax cuts in 2016. But it will be an appropriate year for major changes.

The stock market will tank between now and 2016 and impact the economy but the people had enough of bailouts, enough of wars, enough of big government.

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Comment by Doom

2014-05-04 07:21:09

Same nonsense when everybody said stock market can’t sustain when it reached 10,000. You folks keep chasing the dream houses and cars are coming back down to earth and prices will drop.

What you need to do is realize that this lame duck Gov’t is going down in 2015-2016 elections and business will be back in favor, this can only mean good paying jobs will return .

What is over is ten of everything, to many repeat retail stores,to many fast foods,to many speciality food chains, to many car MFG, the shake out like people who couldn’t afford a house is was good. In the end a market of to much of everything will have disappear?

We will get returns on our money via interest rates hikes.

Comment by Housing Analyst

2014-05-04 08:05:41

Prices are already falling.

Enjoy.

Comment by Whac-A-Bubble™

2014-05-04 08:20:13

“Same nonsense when everybody said stock market can’t sustain when it reached 10,000. You folks keep chasing the dream houses and cars are coming back down to earth and prices will drop.”

Same nonsense when everybody said the Nikkei stock market can’t sustain when it reached 39,000.

Oh wait…

Comment by Whac-A-Bubble™

2014-05-04 08:22:38

Why does Doom constantly confound discussion of bubbleliciously-priced housing by bringing in the irrelevant topic of much lower-priced cars?

For the record, we own three automobiles free and clear. I can have to assume this somehow reflects our decision to not buy a SoCal house at the height of a mania.

Comment by Housing Analyst

2014-05-04 08:45:21

Doom is a fraudster.

Comment by doom

2014-05-04 11:01:57

A fraudster??? You don’t know me, please tell the bloggers who and when I ever took money from in a deceitful or illegal manner or contact signing???

Comment by doom

2014-05-04 11:18:32

Whac… since auto’s is second largest purchase I like to the correlate the two. When houses were 75k cars were avg $4,000 dollars. When houses avg 200k cars increased 7 times to 29k.

Today many cars are over 40k.

People are buying cars in this so called bad economy at record rates, but stop buying houses why? Walk into any car dealer and many leases are like house payments but the dealer can still get you bought, try to buy a house and the lenders won’t look at you.

Folks are buyers of monthly payment and until this Dodd-Frank nonsense and banks stop hoarding their billions in cash they have now housing will suffer.

Comment by Housing Analyst

2014-05-04 11:46:11

Yeah they have to things in common fraudster…. They’re both grossly overpriced and both depreciate.

Let’s stick with those fundamentals first.

Comment by Whac-A-Bubble™

2014-05-04 15:14:33

“Whac… since auto’s is second largest purchase I like to the correlate the two.”

The correlation is negative. Other things equal, the more money you blow on an overpriced McMansion, the less is left over to buy and maintain a decent car.

“But how will the public react if many more billions are spent to keep the GSE’s afloat?”

The same way they react to all bailouts- by stuffing their fat faces with high f*cktose corn syrup laden products while rubbing and pounding the greasy screens of their financed smartphones, oblivious to the world around them.

‘The high demand for Palm Springs has been largely fueled by retirees and second-home buyers, many from coastal communities, who desire the trendier vibe of the city, said Kevin Stern, a broker for Town Real Estate in Palm Springs.’

“Some of the prices are a little too high, and prices are almost back to the point where they were before the fall,” Stern said.’

‘Rising prices and a short supply of homes are squeezing out first-time buyers who want more affordable homes in the $200,000-$250,000 range, agents said.’

Buyers want affordable homes? What’s the alternative?

‘Wages in Silicon Valley for engineers of his caliber have easily grown faster than 6%/year’

So the house prices in any given area should rise as fast as the pay of the highest earning group?

That is what many said about the 1990 bubble. Then it happened in 2005. Many think it is happening again in 2014. There was nothing “unprecedented” about it.”

Analysis depends on the perspective. If one steps back to look at the long term, a 40 year jagged build of credit expansion can be seen. The little sawtooths on the way up are not then perceived as separate manias.

Based on the long-term interest rate cycle, one could date the start of the Great Housing Bubble to the 1981-82 episode, when Volcker slew the inflation dragon with double-digit long-term rates. The subsequent three decades of interest rate declines was one of the major supports for a historically unprecedented increase in housing prices relative to incomes and rents.

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Comment by Jingle Male

2014-05-04 04:00:19

Whac, this is one of your most important points, IMHO. I agree with you on this.

Comment by Blue Skye

2014-05-04 07:22:55

The conclusion is that anyone who bought in the last decade is headed for a clock cleaning.

Comment by Doom

2014-05-04 07:27:16

Make that on more who agrees with that assessment, back in the mid 80’s I was wondering about what the heck is going on with rates. Very astute point, good for you Whac!

Back in the 80’s I was wondering how people could keep or would want to keep being automobiles at inflated prices. Every one said:that you always have a car payment like you always have a house or rent payment, no big deal. Or that’s what they cost, get over it. All easily made more digestible by the how-much a-a-month plan and home equity loans.

Comment by doom

2014-05-04 11:33:29

Exactly.. many people are payment buyers only. When I was in the auto business can’t tell how many times people were not interested in the terms ( 8 year loan okay)?, just what is the final payment and can you get us bought.

Same in housing, when the height of the housing recession was in play, neighbor told me the bank would let them walk and short sale the home without foreclosure, they were grossly underwater.

Or the option of a 5 year arm at a reduce monthly payment they could handle (not really). I told him take the short sale, you are so buried that in 5 years your house still won’t break you even, and the house payment will still be to high right. He said yes, but the house payment is all we care about, guess what they are moving out, they tried to sell to get from under, the buyers saw he paid to much in during the boom why should they bail them out now.

Comment by Housing Analyst

2014-05-04 17:11:32

Apparently not considering housing demand is cratering to 20 year lows.

You say 5 times the avg income and folks would heed that warning, I say many men or woman who are married to spouses who spend 5 times their salary, somehow they still are married to each other, a (20%) credit card was the downfall of a nation.

If you folks think common sense plays into most households, I got that bridge for sale and probably many takers?

Mark Kelly — a retired astronaut turned gun control advocate after his wife, former Arizona congresswoman Gabrielle Giffords, was nearly killed in a 2011 mass shooting — will deliver the keynote address at the National Association of Realtors’ annual conference in November.

Kelly will take the stage on Saturday, Nov. 8, on the second day of the 2014 Realtors Conference & Expo in New Orleans, which will run Nov. 7-10. Giffords will also make a special appearance, NAR said in a press release.

He’s such a ridiculous parody of a conservative, I have to wonder if he’s a liberal in disguise.

Then again, I’ve met quite a few like him that are True Believers in the Glen Beck Gospel… so maybe he’s the real deal.

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Comment by Whac-A-Bubble™

2014-05-03 14:56:42

“I have to wonder if he’s a liberal in disguise.”

I thought the same thing about the Republican Party’s presidential candidate field during the last election: Was there a secret libruhl conspiracy to serve up a field of clowns on the Republican side in order to assure a permanent Democrat supermajority would keep a Democrats in the WH forever more?

I looked it up, it’s kind of interesting. Palingenesis means rebirth, being born again. Griffin claims that palenegentic ultranationalism, the idea of the rebirth of the nation, which will make it great again, is a central element of fascism.

After a decade of boom-bust-boom, the U.S. housing market is going downhill just when many economists thought it would be heading upward. Sales of previously owned properties tumbled 7.5 percent in March from the previous year, to the slowest pace in 20 months, while purchases of new houses sank 14.5 percent from February. And applications for mortgages to buy homes are down 21 percent from this time last year, indicating fading demand during what is typically the busiest season for deals.

Mortgage interest rates are rising from record lows as the Federal Reserve reduces its bond-buying program. Hedge funds and other big investors have decreased their purchases of homes to rent out. “The very-low-rate environment and the high level of investment activities really masked how weak the housing market was,” says Sam Khater, deputy chief economist at CoreLogic (CLGX). “Once it goes back to the normal owner-occupied purchase market, you really realize how weak the market is.”

Housing’s woes are slowing the economic recovery. Residential investment, including construction of single-family and multifamily homes, residential remodeling, and brokers’ fees, accounted for 3.1 percent of gross domestic product in the fourth quarter, less than half the peak contribution of 6.6 percent in 2006, according to an April 28 report by Capital Economics. “The apparent crumbling in the housing recovery has, at least temporarily, removed a valuable support to GDP growth,” the report said.
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The vastly underwater is the problem and gov Romney had it right. The bailing out of people with these loan Mods and other dumb save the stupid buyers plan backfired. Gov Romney wanted them to be foreclosed on get on with it. Now these people have over priced their homes to get back to at least even, the buying public isn’t bailing them out and neither should have the The Fedreal Gov?

All the jack wagon pimps and shills are going to try to save it again when they should all be broke.

I know a person who just sold a house in a month in San Diego for $750000. They bought in 2008 for $675,000. I think they did some improvements to the house in that time, but I don’t know what.

It previously sold in 1999 for $183,000.

So the price tripled plus since 1999. Nothing justifies this. Nothing in he economy. Nothing changed in location. Not the Mexicans streaming across the border or the Chinese all cash or whatever. Just nothing. It is all just BS. In 1999 a person could afford to live in San Diego. Now, unless you are in the top 5 percent of families in income, you cannot. Simply unsustainable.

And this guy, did he even make any money on the house? $75,000 in 6 years, minus commissions, I doubt it.

I put in the word “leveraged” to infer he could have borrowed $750k to invest in stocks in 2008 and have a gain several times more than the $75k.

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Comment by Whac-A-Bubble™

2014-05-04 10:04:10

Isn’t it odd how Uncle Sam openly encourages U.S. households to use massive leverage to purchase homes they cannot afford and which are likely to eventually result in household financial ruin, while not offering the same encouragement to make leveraged purchases of stocks, which are likely to pay far higher returns over the long run?